Creative accounting probe hammers Chinese tech firms [SCANDAL]

Here's a collection of terms you don't want to see appear in a story about your company: Department of Justice (DOJ), SEC, FBI, accounting irregularities, civil penalties, criminal charges. But that's exactly what a number of Chinese firms are facing due to a US probe into their activities. From the sound of it, this is one serious investigation involving multiple federal prosecutors, according to SEC director of enforcement Robert Khuzami. He also says greater DOJ involvement over time is likely, hinting that criminal charges are possible as well as civil penalties from the SEC. One of the big problems? A lack of 'proper accounting and reliable audit review', which the SEC says is 'just not acceptable'. No kidding. As you might think, however, this didn't happen overnight. Last month, for example, the SEC formally asked Deloitte's Shanghai branch to turn over documents from its audit of Longtop Financial Technologies. A number of Chinese companies have gone public in the US through reverse mergers of shell companies. Because the shells already exist and are technically public, the purchasing company avoids a lot of the scrutiny that comes with filing for an IPO. (Want to know how uncomfortable that can be? Ask Groupon.) As a result, several Chinese stocks - including search engine biggie Baidu, internet video company Youku, social networking website Renren, online media company SINA Corp and interactive media company Shanda Interactive Entertainment - saw their stocks smacked about last week, even though none of them have been accused of anything yet. [Article by Erik Sherman, Inside Investor Relations]

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